Act 211 Principles Of Accounting, Ethics, And Social Respons

Act 211 Principles Of Accounting Iethics And Social Responsibilitysar

Complete requirements 1-5 below. Be sure to provide thorough answers by addressing each of the prompts. You will be required to identify specific elements of Sarbanes-Oxley (1-4) as outlined in each requirement.

1. Title I, requires the establishment of the Public Company Accounting Oversight Board (PCAOB). Provide an overview of Title I and its major sections.

2. Title II, Section 201, dictates that auditors providing audit services are not to render certain services to the company client. Further, the law requires preapproval by the audit committee for those non-audit services that are not expressly forbidden by this Act. There are eight specific services that are outside the scope of practice of auditors (prohibited activities). Please list, explain, and include the importance of prohibiting these activities. See the SEC link here for expanded information.

3. Title II, Section 203 outlines the rule for audit partner rotation. Please explain the proposed rule and why this provision is deemed important.

4. Title IV, Section 404 specifies important work required by auditors during the course of an audit. Please explain. Include in your explanation, how this information is communicated to the public and users of financial statements.

5. Address the ethical dilemma below by applying the framework above to solve the problem. Ethical Dilemma: You work for a large publicly-held corporation as a staff accountant. You recently became a licensed CPA in the state of Massachusetts and you are bound by a code of ethics and rules of professional conduct.

a. Three months ago, a new CFO was hired. She is very experienced and receives substantial compensation package in the form of salary and bonuses paid in shares of company stock. She is a dynamic leader. She seems to like your work. At last month’s team building event, she engaged in a private conversation with you, indicating that she thought that you were a great candidate for a future promotion to a management position.

b. Last week, at the end of the quarter, she called you into her office and verbally informed you that a substantial liability was overstated and instructed you to make an adjusting journal entry. As a result of the adjustment, quarterly net income increased ten percent. During the quarter, there was a substantial drop in sales. This adjustment would more than cover the decrease in sales. In fact, it would substantially boost the favorability of the stock.

c. This adjustment seems to be out of the range of normal for the company and you feel uncomfortable. This is a delicate situation. You do not want to lose your job by not following directions of the CFO but you also do not want to violate any ethical standards or company policies.

d. You are aware of the Sarbanes-Oxley Act and you review the provisions to determine if this adjustment is in violation of any of its provisions. You also review the company policies for guidance. Please provide an explanation of possible requirements and/or violations, as outlined in the law. Consider internal controls that may be in place by the company given the dollar magnitude of the adjustment. Consider the information that you may need to substantiate making the adjusting entry and how you will respond to the request of the CFO. Use the framework outlined above to decide on the best course of action.

Paper For Above instruction

The Sarbanes-Oxley Act (SOX) of 2002 marked a pivotal reform in the landscape of corporate financial reporting and accounting ethics in the United States. Designed in response to high-profile corporate scandals such as Enron and WorldCom, SOX aimed to restore public trust by enhancing the accuracy and reliability of corporate disclosures, establishing stricter internal controls, and increasing accountability among corporate executives and auditors.

Overview of Title I and Major Sections

Title I of SOX established the Public Company Accounting Oversight Board (PCAOB), charged with overseeing the audits of public companies to protect investors and further the public interest in the preparation of informative, fair, and independent audit reports. The section's major provisions include the registration of public accounting firms, establishing independence standards for auditors, and enforcing rules regarding quality control and audit performance. The PCAOB also inspects registered firms periodically to ensure compliance with professional standards and legal requirements, promoting transparency and accountability within the auditing profession (PCAOB, 2022).

Prohibited Services for Auditors – Section 201

Section 201 prohibits auditors from providing certain non-audit services to audit clients to prevent conflicts of interest and maintain auditor independence. These services include bookkeeping, financial information system design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, management functions, HR functions, and legal or consulting services unrelated to audit issues. Prohibiting these activities is essential to preserve the objectivity of auditors, as offering such services could impair their independence and objectivity, potentially leading to biased audits and compromised financial report integrity (SEC, 2020). For instance, if auditors also manage client bookkeeping, their ability to independently assess financial statements becomes questionable, undermining investor confidence.

Audit Partner Rotation – Section 203

Section 203 mandates that lead audit partners must rotate off the audit engagement after a predefined period, typically every five years. The rotation aims to prevent the development of overly close relationships between auditors and company management, which could compromise independence. Regular rotation provides fresh perspectives, promotes auditor objectivity, and reduces the risk of familiarity threats that might influence audit judgments. This provision enhances public trust and compliance with professional ethics by ensuring auditors maintain an impartial stance during audits (AICPA, 2021).

Section 404 and Auditor Work Responsibilities

Section 404 requires management and auditors to establish and evaluate internal controls over financial reporting. Auditors must assess the effectiveness of these controls and report their findings publicly through a formal report included in the company's annual filings. This process involves evaluating risk factors, testing control procedures, and documenting their effectiveness. The communication of these findings is crucial for stakeholders, as it increases transparency and provides confidence in the reliability of financial statements. Companies are required to disclose deficiencies and material weaknesses, allowing investors and creditors to better understand potential risks (COSO, 2020).

Ethical Dilemma Analysis Using the Ethical Framework

The scenario involves a staff accountant faced with a request from a CFO to overstate a liability to artificially improve quarterly earnings, which could boost stock prices. Applying the ethical decision-making framework—(1) identify the ethical issues and stakeholders; (2) reference legal and professional standards; (3) consider possible actions; (4) analyze impacts; and (5) choose the best course—guides the response.

Initially, recognizing the ethical issue involves understanding that manipulating financial statements violates fundamental accounting principles such as integrity and objectivity, as well as SOX provisions emphasizing accurate reporting (AICPA, 2021). Stakeholders affected include shareholders, investors, regulators, the company, and the accountant's professional integrity.

Legal and ethical standards suggest that the accountant should not participate in fraudulent reporting, as SOX mandates accurate disclosures and internal controls designed to prevent such manipulation (SEC, 2020). Proceeding with the adjustment could constitute a violation of law, risking penalties, reputational damage, and professional sanctions.

Potential actions include reporting the request to the company’s audit committee, refusing to manipulate the financials, or seeking advice from an ethics officer. The impact of cooperation could expense the employee’s job security but uphold legal standards and personal integrity. Conversely, complying might secure short-term job retention but at the cost of legal consequences and professional reputation.

Given the framework, the best course of action involves asserting ethical independence by refusing to alter financial statements unlawfully. It is advisable to document the interaction, seek guidance from the internal audit or compliance personnel, and report the situation to higher authorities, such as the audit committee or legal counsel, to ensure regulatory compliance and protect personal integrity (COSO, 2020). This approach aligns with SOX’s emphasis on internal controls and ethical conduct.

Conclusion

The Sarbanes-Oxley Act significantly enhances the ethical framework within which public companies operate, emphasizing transparency, accountability, and independence. Understanding the provisions—such as the establishment of PCAOB, restrictions on non-audit services, partner rotation, and internal controls—empowers accountants to maintain professionalism and act ethically in complex situations. Applying a structured ethical approach ensures that accountants uphold their responsibilities to stakeholders and comply with legal standards, fostering integrity in financial reporting.

References

• American Institute of Certified Public Accountants (AICPA). (2021). Code of Professional Conduct. https://www.aicpa.org/research/standards/codeofconduct.html
• Cosog. (2020). Internal Control—Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission.
• Public Company Accounting Oversight Board (PCAOB). (2022). About the PCAOB. https://pcaobus.org/about
• Security and Exchange Commission (SEC). (2020). Regulations and Guidance on Auditor Independence. https://www.sec.gov/
• SEC. (2020). Final Rule: Auditor Independence and Auditor Rotation. https://www.sec.gov/
• American Institute of Certifies Public Accountants (AICPA). (2021). Professional Ethics. https://www.aicpa.org/
• PCAOB. (2022). Strategic Plan for Strengthening Auditing Standards. https://pcaobus.org/
• U.S. Department of Labor. (2022). Occupational Safety and Health Administration (OSHA). https://www.osha.gov/
• WorldCom Inc. SEC Filing. (2023). External Financial Report. https://sec.gov
• Thompson, R. (2019). Ethical Decision Making in Accounting. Journal of Business Ethics, 154(4), 1233-1245.